Bailing So Easily

Market rode despair lower as world banking seems to taking a bit of hit. Imagine all those smart government subsidized bankers not being able to get figure out how to run a world with no job growth, no return on savings, and no margins to screw people.

TARP, the debt ceiling deal, and every pro business ruling by the Supreme Court, all been to the corporate world's advantage. It may be an oversight by investors to bail so easily, but being burned again seems so cruel. Ultimately, the best investments are not in cash and fixed income but in US companies who will continue to have a world of economic accommodation each time world economic order tilts.

Let's Get Long

Let's get long and volatile.

Jobs are few, stocks are down, no return on any money. Banks won't lend. Republicans look to start reign of terror over the next several years. TARP for banks and investment firms while it is austerity for everyone else.

Weakness in stock and index markets demonstrates just how vulnerable investments are today to stupid action. Gold keeps a bid as the dumbest form of investor climbs into the eventual giant bubble master deluxe gold fail-a-thon. Each day herds of gold bugs stampede up the lane to the top, merrily, merrily, etc. I thought ag bulls were the dumbest form of trader.

Jobs number on Friday does not have any fans, and in part, some of the Bear action has already been played in the first two trading sessions of this week. Stimulus by the Fed is being designed from some scientific invention which will be put into the food chain for economic consumption.

Chicken De Fault II

Continuing on the default scenario, business have an odd relationship with government. Big banks, investment firms, and the corporate world have relied on the government for business, innovation,(Nasa, government research at universities,etc), and of coarse bail outs. The mere fact of a potential governmental cutoff in payments to the world is going to create a trading market death dive possibility.

However you may be saved. A story yesterday in MarketWatch had a headline that Apple was better than Gold. Now that says it all. Performance in itself by two overpriced entities reflects the push of investment dollars into those lemming flow manias which have the least resistance to selling because of a psychology about their value. It is always about the money. Apple and gold share a racing card where choices are narrowed into the ever so human habit of trading on a popular concept. The concept for gold is that it is an alternative currency. The concept for Apple is that it will forever be without peer in producing gadgetry. Gold is a medal popular in making jewelry and no one will ever use it as a currency. Every Apple product has an already functioning substitute. Sell them both.

Given the appallingly low confidence the world has in its economic future it is no doubt that investors should believe that by limiting their choices to just a few stocks or commodities, they are avoiding making bad investments. All in is always all bad.

As for stocks in general, default is like catching a cold when your immune system is already compromised with another disease. The species will survive but you may not.

Chicken De Fault

Default by the US will make interesting case studies for all the econ/business folks. At first, markets will try to determine where the next information edge will emerge from any default/recovery trading or any almost default action. Secondly however, world economic confidence in US governance and its ability to grow a recovery will slow things a bit.

You have to admire the Republicans, which is always hard to do, but at least they playing the risk side edge to the max in order to place everyone in a game of political chicken. Now the game of chicken in game theory would not just be who blinks first, but also who loses the least when no one blinks and a true collision occurs. The Republicans obviously figure they will lose the least in a default although that runs against what news talk folks are saying. But they are probably right. Since the worst possible outcome in this game is default, the least worst, if you will, is for the party not in the White House. Voters will remember the event as a leadership issue which is why the president is working so hard to avoid the default. Fair or unfair, when you are at the top, they blame you.

Forget what Geithner and everyone else is saying about the default. Everyone will line up to get paid a bit later. If we have learned anything is the last few years, the power folks always get paid and everyone else feeds on watered down economic opportunities.

Where Happiness Lives

Apple knows how to make money and game expectations on earnings. As mentioned several times on BaseOp2, analysts covering Apple are always surprised by the powerful earnings which they themselves always seen unable to anticipate. There motto should be, " if its news about Apple, its news to us."

Anyway, the tech sector has the greatest brand names which makes it easier for the forever hopeful investor to give it a shot. Debt talks yielding anything which raises the national tab will be viewed as favorable with the market Bears turning again to the Euro Zone and US jobs. A foul up on debt talk would of course scramble the nervous and the market would be playing with an unknown radical factor with weird negative volume and volatility.

There are some unusually negative indicators in the stock indexes which have been running all year. This year more than ever, every trading house of size and experience is committed to the momemtum play, running money infront of each second of opportinity. This has created an odd techinical profile which holds extremely negative downside potential if energy from the momentum lemmings decide down is where happiness lives.

Total Investment Serenity

There is a virtual drug formula which now allows the investment in all things of great potential and the same time permits one to forget about any risk. This formula, while quite simply, has been worked on for several years now by various world financial institutions, each contributing their own great thoughts to enable its completion. This drug formula will not be unveiled in any grand ceremony nor by any particular group. It is rather meant to be plugged into a central computing network to bring about Total Investment Serenity. TIS true. No more worries ever again.

The first to receive this new vaccine against economic disaster is Greece. While several drug companies have filed patents on similar notions, TIS is an attitude not a real drug. It makes you feel as if you can invest in anything stupid. Roll it all on any social network or any sovereign country debt without any unpleasant morning after effects. TIS is particularly affective on Credit Default Swaps. When used properly, TIS will create a feeling, no an obligation, that all things financial should be saved. This break through is believed to help corporations who might have given you a job feel better and also has proved affective in trial uses on the other guy who actually got the job but lives in another country. Similar trials are now being done to see if TIS works on bringing home off shore income with no taxes.

Side affects may include nausea, empty account syndrome, foreclosure, dizziness, and rash judgement.

Dead or Alive?

Rallies keep emerging out of potentially disastrous economic scenarios like a relentless zombie in a ' i thought it was dead' horror movie. The bulls look at the market this way.

Greeks will pass minimal legislation and a template for EU debt will emerge.

Stocks represent lean mean cash machines which are offered at a discount to future earnings.

All domestic government spending is going to decline which will please those who have jobs.

Those who have jobs represent a solid base from which further real declines are not likely and are enough to make the economy expand ever so slightly.

A drive out of government fixed income and into all corporate risk is about to take a giant leap.

Spreads between after debt service on rentals and the rents paid is widening which means the housing bust is over.


Bears on the other hand see it as a simple matter of jobs. They will give in when big job growth appears.

There is an interesting article in MarketWatch by Brett Arends reviewing data from Trim Tabs of corporate buying of their own stock to the tune of $124 billion in the first quarter. This money came from profits and a whopping increase in corporate borrowing by non financial firms of a $100 billion dollars, raising corporate non financial debt to a record $7.3 trillion.

Markets Ponder Several Problems

Equity markets have been nervous lately. Not just in terms of the current price retracement, but with a much greater degree of concern that the U.S., this time, is declining into an inevitable reckoning due to seemingly unsolvable governmental and private debt structures. Sovereign debt issues, QE2 cessation, and U.S. default fears, are all greasing the current slide. The markets also having an odd debate over the risks of inflation with, on the one hand, the belief there will be unavoidable repercussions of easy money, and on the other, the total lack of demand stemming from a stagnant and an increasingly jobless America. What with TARP being viewed correctly by the public as an entitlement program for the financial elite in this country, and the problem of two parties unable to provide hope for future job opportunities, traders are focusing on several primary realities.

(1) Job creation will be hard given that austerity means less growth and a slower economy. (2) China is a hype which has started to correct. (3) Over 25% of homes in the country are underwater and about 50% could not find a buyer for their market price if they tried. (4) Wall Street thinks Republicans are backing noble goals but are crazy to play with U.S. debt given the resulting negative play on world equity prices.

Number one. There is just no way around the negative impact of smaller government to the broader economy. Forget the economic debate. Cutting spending by cutting jobs will create a large whole which cannot be filled by the private sector. Traders are trying to determine whether the markets will have to cycle through a dominate Republican austerity reign of terror for several years or will have a milder not so austere compromise and split rule.

Number two. China has started a correction but who knows what an undemocratic monster economy correction will looks like. A hard correction would be unnerving since most strategic investment decisions by world economic giants would be altered.

Number three. Real estate is an orphan now with little hope. Practically ignored by the Obama Administration. It has always been the most important issue and for an Administration with a positive slogan as "Yes We Can", the reality became "Guess We Can't."

Number four. What can you say about tangling the possibility of the world largest economy defaulting for political gain. Now there's plan.

For traders, positive turns in any two of these four keeps this market moving higher.

View of Down

Disaster Not Averted
by Dean Baker, The New Republic

When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression: allowing a cascade of bank failures that both destroyed much of the country’s wealth and left the financial system badly crippled. Instead, however, we acted, and these days the accepted wisdom is that the TARP and other special lending facilities created by the Federal Reserve Board prevented a similar collapse that saved us from a second Great Depression. But this view badly misunderstands the nature of the first Great Depression—and may, in fact, result in the country suffering the second Great Depression that the pundits claim we have averted.

Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II. Deficits peaked at more than 25 percent of GDP. This would be the equivalent, in today’s economy, of running annual deficits of $4 trillion.

Loss Aversion

Creating jobs and the psychological positives attached to growing employment numbers are apparently what markets are going to need in the months ahead. I can't get over the feeling however that this is about the old loss aversion theory; that people prefer avoiding losses to acquiring gains. I see it strategy choices all the time. Traders would rather choose a pattern of trading where the risk averse strategy limits there ability to participate in opportunities for gains. Bears choose the least up and Bulls pick the least down even when probabilities are equal. In the case of this market, participants do not want to be a party to the most anticipated Great Depression II on record. Ugly is going to get every opportunity to prove itself and whether it becomes self fulfilling or a sucker play, we will know soon.